Tuesday, October 13, 2015

If Gail Tverberg has figured out the true story about the economy, then this is probably as close as the mainstream might come to understanding the real situation. Lawrence Summers correctly notes that we are entering a secular stagnation, but he seems oblivious to the root cause. The economy is not slowing down due to people's changing "propensities" to save and invest or whatever, but because of diminishing returns in the extraction of energy and other natural resources. Economic growth can only be created by adding an increasing amount of cheap energy, which is a very tall order at this stage of the game and getting exponentially harder all the time. To bring back growth, we would need lots of oil which can be produced for $20 a barrel with an EROEI of 50 or a similarly cheap drop-in replacement for oil, but nothing like that is on the horizon anymore. No known energy source can deliver the exergy needed for its own production and sufficient economic activity to have a market capable of affording it. The cheap oil is almost gone and renewables don't produce enough surplus energy to pull their own weight, much less create economic growth. The result is deflation, which is a highly unstable state.

We are not merely facing a Japanese-style recession which can drag out for decades, because that can only be sustained when the rest of the word economy is growing. When the entire world is in the same stagnant state, it becomes much harder to maintain stability. When growth ends globally, the system will likely fall apart like a dome of Leonardo sticks. At least if we try to run it the same way we are used to, based on debt, because that only works in a growing economy. No one has conceived of a realistic alternative, however, so the only way we can forestall collapse is to keep adding more debt. There is absolutely no way to repay debt when the economy is shrinking, so this path must lead to disaster. Perhaps Summers is right that there is still room to increase the debt some more if interest rates are kept at zero or negative indefinitely, but this entire paradigm is fundamentally close to its breaking point.

It will be exciting to see how it plays out, and then horrible when the electric grid goes down due to lack of spare parts because international trade has ceased and we die. If we had the option of simply using less of everything, it wouldn't be so bad, but there is no way to do that when profitability is the only way to keep essential services such as the oil industry and other mining operations running. Deflation means commodity prices drop too low for producers, which means they have no choice but to shut down production, and so even the rich will get none of life's necessities and nearly all assets will become meaningless.

The world is rudderless and adrift, with no chance of sufficient awareness and cooperation to mount a meaningful response to deflationary collapse. Individuals can understand our predicament, but as a species we can apparently only follow the religion of growth. Politicians can only get elected by promising prosperity, even if it is a lie, while the only politically correct worry is climate change, which happens too slowly to be relevant anyway if we are facing deflationary collapse now.

It is tempting to wish for some kind of conspiracy who has plans ready for a new world order, but I know better than believing any group would be capable of coordinating such an effort. The only thing we can do is to enjoy the short time we have left while industrial civilization is still with us. Every day I marvel at how lucky I am to be alive at the height of human existence, in the absurdly prosperous times when our species gets to consume several million years' worth of solar energy per year. Our age is truly exceptionally wealthy even in a perspective of a hundred million years. There are still many things to be angry about in the world today, of course (feminism, for example), but the economy is actually a miracle which will never get any better than this. People who think growth is "normal" and will soon return are ridiculously deluded and strike me as ungrateful for the very transient miracle of industrial civilization that we are still enjoying for the time being. We should be positively thrilled to have a secular stagnation, if it doesn't get any worse than that!

I think we are currently in a period of calm before the storm. Every day I read about more layoffs in the oil industry, but so far no major bankruptcies. Many companies are surely teetering on the brink, however. Since there are no realistic prospects of commodity prices ever rising again to the levels needed for profitability, the situation is bound to get much worse before long.